Heckscher-Ohlin Theory (1)

Abstract

In the classical theory of interational trade, the comparative advantage in the sense of the comparative costs is simply given exogenously. In other words, it is presupposed that different countries have different technology of production, which includes the difference in natural conditions for the production like the climate. In the modern theory of international trade, however, it is assumed that different countries have the identical technology which is given in the form of the identical production function. The comparative advantage of the different countries is explained, then, not by the difference in technology, but by the difference in the factor endowments. Such a modern theory is generally known as Heckscher-Ohlin theory, because the groundwork for substantial developments in the theory is laid by Eli Heckscher [1919] and Bertil Ohlin [1933].